Archive for the ‘Mat’ Category

The Securities and Exchange Commission today announced that two Citigroup affiliates have agreed to pay nearly $180 million to settle charges that they defrauded investors in two hedge funds by claiming they were safe, low-risk, and suitable for traditional bond investors. The funds later crumbled and eventually collapsed during the financial crisis.

An SEC investigation found that the Citigroup affiliates made false and misleading representations to investors in the ASTA/MAT fund and the Falcon fund, which collectively raised nearly $3 billion in capital from approximately 4,000 investors before collapsing. In talking with investors, they did not disclose the very real risks of the funds. Even as the funds began to collapse and CAI accepted nearly $110 million in additional investments, the Citigroup affiliates did not disclose the dire condition of the funds and continued to assure investors that they were low-risk, well-capitalized investments with adequate liquidity. Many of the misleading representations made by Citigroup employees were at odds with disclosures made in marketing documents and written materials provided to investors.

“Firms cannot insulate themselves from liability for their employees’ misrepresentations by invoking the fine print contained in written disclosures,” said Andrew Ceresney, Director of the SEC’s Enforcement Division. “Advisers at these Citigroup affiliates were supposed to be looking out for investors’ best interests, but falsely assured them they were making safe investments even when the funds were on the brink of disaster.”

According to the SEC’s order instituting a settled administrative proceeding:

* The ASTA/MAT fund was a municipal arbitrage fund that purchased municipal bonds and used a Treasury or LIBOR swap to hedge interest rate risks.

* The Falcon fund was a multi-strategy fund that invested in ASTA/MAT and other fixed income strategies, such as CDOs, CLOs, and asset-backed securities.

* The funds, both highly leveraged, were sold exclusively to advisory clients of Citigroup Private Bank or Smith Barney by financial advisers associated with CGMI. Both funds were managed by CAI.

* Investors in these funds effectively paid advisory fees for two tiers of investment advice: first from the financial advisers of CGMI and secondly from the fund manager, CAI.

* Neither Falcon nor ASTA/MAT was a low-risk investment akin to a bond alternative as investors were repeatedly told.

* CGMI and CAI failed to control the misrepresentations made to investors as their employees misleadingly minimized the significant risk of loss resulting from the funds’ investment strategy and use of leverage among other things.

* CAI failed to adopt and implement policies and procedures that prevented the financial advisers and fund manager from making contradictory and false representations.

CGMI and CAI consented to the SEC order without admitting or denying the findings that both firms willfully violated Sections 17(a)(2) and (3) of the Securities Act of 1933, GCMI willfully violated Section 206(2) of the Investment Advisers Act of 1940, and CAI willfully violated Section 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8. Both firms agreed to be censured and must cease and desist from committing future violations of these provisions.

The SEC’s investigation has been conducted by Olivia Zach, Kerri Palen, David Stoelting, and Celeste Chase of the New York Regional Office, and supervised by Sanjay Wadhwa.

Aidikoff, Uhl & Bakhtiari announces it’s continuing investigation into the ASTA/Mat municipal arbitrage funds launched by Citigroup Global Markets, Inc. and sold through Smith Barney, part of Citigroup’s (NYSE:C) Global Wealth Management Group. The ASTA/Mat funds were first rolled out in 2002 and imploded in February 2008 causing catastrophic losses to investors.

“The Mat funds were marketed to clients as a fixed income product producing a couple of extra points above municipal bonds,” according to Philip M. Aidikoff. “In truth, the Mat funds were a highly risk leveraged bet subjecting clients of the firm to losses that could possibly exceed 100 percent or more of an investors initial capital.”

In May 2010 two Los Angeles based Financial Industry Regulatory Authority (FINRA) arbitration panels awarded more than $2.2 million to clients of Aidikoff, Uhl & Bakhtiari representing a return of 100 percent of the clients’ principal losses.

“The municipal arbitrage strategy employed by the Mat funds was risky and exposed investors to 2 times more volatility than the S&P 500 and 7 times more volatility than a traditional portfolio of municipal bonds,” stated Ryan K. Bakhtiari.

Aidikoff, Uhl & Bakhtiari represents retail and institutional investors around the world in securities arbitration and litigation matters. Attorneys for the firm have appeared before the Financial Industry Regulatory Authority (FINRA) and in numerous state and federal courts to resolve financial disputes between customers, banks, brokerage firms and other financial institutions. More information is available at www.securitiesarbitration.com or to discuss your options please contact an attorney below.

Aidikoff, Uhl & Bakhtiari announces an investigation into the 1861 Capital Management municipal arbitrage funds sold by UBS and other broker dealers. The 1861 Capital funds imploded in February 2008, causing catastrophic losses to investors.

“1861 municipal arbitrage funds were marketed to clients as a fixed income product producing a couple of extra points above municipal bonds,” according to Philip M. Aidikoff. “In truth, the 1861 funds were a high risk leveraged bet subjecting clients to a significant loss of principal.”

In May 2010 two Los Angeles based Financial Industry Regulatory Authority (FINRA) arbitration panels awarded more than $2.2 million to clients of Aidikoff, Uhl & Bakhtiari, representing a return of 100 percent of the clients’ principal losses in cases involving the Citibank ASTA/Mat municipal arbitrage funds which are similar to the 1861 product.

“The municipal arbitrage strategy employed was risky and exposed investors to about 2 times more volatility than the S&P 500 and about 7 times more volatility than a traditional portfolio of municipal bonds,” stated Ryan K. Bakhtiari.

The hedge-fund community is in crisis mode after crashing and burning in the aftermath of the global credit crisis. 1861 Capital Management, ASTA/MAT, Tontine Partners LP, and The Ospraie Fund, are just a few of the hedge funds who have suffered a fate tied to investor redemptions and illiquid assets, which ultimately has left thousands of individual investors, charities and pension fund holders facing some huge and unforeseeable financial losses.

The past year has seen hundreds of hedge funds go out of business. In 2008, some 920 funds were shuttered – a figure that eclipses the prior record set in 2005 when 848 hedge funds closed down. On average, hedge funds lost more than 18% last year. The previous worst performance by hedge funds occurred in 2002, posting a loss of 1.5%. In 2007, hedge funds returned 9.9%. As hedge funds literally fought for survival in 2008, many would lose the battle altogether.

Among them: The Ospraie Fund, which posted nearly a 40% loss in2008. An even worse performance came from the Tontine Partners LP hedge fund, which ended the year down an astonishing -91.5%. Other funds such as Tudor Investment Corp. and Citadel Investment Group LLC have been forced to limit investor redemptions or risk implosion. Earlier this month, Citadel, whose flagship hedge fund lost 55% in 2008, announced plans to resume payouts to investors. Investors’ access to their money, however, will occur no sooner than April 1.

Hedge funds that trade municipal bonds also are experiencing a rough time these days. As reported Feb. 29, 2008, by MarketWatch, problems with bond insurers and other disruptions borne out of the global credit crunch have pushed yields on municipal bonds close to, or above, those of comparable Treasury bonds. For hedge funds that try to make money from the difference, called the spread, between the yields, the end result translates into the likelihood of margin calls.

That’s exactly what happened to hedge funds like Citigroup’s ASTA/MAT hedge funds. In using a municipal arbitrage strategy, the funds ultimately were forced to sell their positions at fire-sale prices, causing significant losses to investors. The dismal performance of hedge funds has continued into 2009. One of the most recent hedge funds to shutter is the Highland CDO Opportunity Fund, which encountered massive losses from its holdings of high-risk collateralized debt obligations (CDOs). In October, similar circumstances forced Highland to close two other hedge funds: the Crusader Fund and the Credit Strategies Fund.

The shocking upheaval in the hedge fund industry is casting new light on the largely unregulated world of hedge funds. Registration with the Securities and Exchange Commission (SEC) is done on a voluntary basis only. At the same time, investments in hedge funds have grown astronomically. At their peak, approximately 10,000 hedge funds managed nearly $2 trillion in assets. Today, the figure is closer to $1 trillion.

According to Senators Chuck Grassley and Carl Levin a new bill introduced to the Senate has been designated to improve the carelessness and transparency of the hedge fund industry. Introduced on January 29, 2009 the Hedge Fund Transparency Act of 2009 (S. 344) would make it mandatory for hedge fund managers to register with the SEC and open up their books to government examiners. Following their original statement Senators Grassley and Carl Levin also described the bill as an “attempt to address securities law loopholes that enable hedge funds to operate under a cloak of secrecy.”

Citigroup CEO Vikram Pandit seems to be caught in the crossfire of the banks misdoings and deservedly so. Investor lawsuits connected to the marketing and sale of a group of proprietary Citigroup hedge funds sold under the brand names ASTA and MAT were emerging at an alarming rate. Marketed to investors as safe fixed-income funds with losses not to exceed 5%, the hedge funds fell by a large amount in the midst of the credit crunch. Ultimately, the value of the funds suffered a loss of between 60% to 80% and many investors lost their life savings as a result.

Legal issues surrounding ASTA/MAT aren’t the only problems facing Pandit. Adding to his woes: $36 billion of net losses during the past six quarters.

More criticism was levied on Pandit courtesy of Sheila Bair, chairman of the Federal Deposit Insurance Corp. (FDIC). In a story appearing June 5, 2009 in the Wall Street Journal, it was reported that Bair’s office had been maneuvering to oust various members of Citigroup’s top executives. Specific individuals were not identified in the Wall Street Journal story, but Pandit’s name was rumored to be among those on Bair’s list.

Adding fuel to Citi’s management shake-up rumor mill is the apparent delay of a stock swap agreement between the U.S. Treasury Department and Citigroup. Announced in March 2009, the deal entails converting $53 billion of Citigroup preferred stock into common shares, giving the U.S. government a 34% stake in the bank.

Another black mark occurred for Citigroup on June 1, 2009 which signaled the bank’s final day on as part of the Dow Jones Industrial Average. On Monday, June 8 last year Citigroup was replaced by The Travelers Companies.

Following the initiation of the federal government’s Troubled Asset Relief Program (TARP), Citigroup was named a recipient of $45 billion in taxpayer funds after the bank began to watch its stock consistently deteriorate throughout 2008 and 2009. In mid-January 2009, Citigroup shares traded below $5 and on June 8, 2009 the stock closed at a shocking low of $3.42; by comparison, the price was reported at $20.48 per share one year prior at the same time.

After a run of previous failures, the Citibank is now closing its $400 million Tribeca Convertible LP arbitrage fund. It is the final chapter in Citigroup’s plan to shut down its Tribeca Global Investments hedge fund.

Investor redemptions are thought to be the reason behind the fund closing. According to an Aug. 4, 2008 article on Bloomberg.com, Tribeca Convertible was down less 5% this year, after rising 5% in 2007 and 20% in 2006. Tribeca Global Investments was created in 2004 as Citigroup’s flagship hedge fund group. At the time, the fund intended to raise $20 billion. Instead, it attracted $2 billion.

Cititgroup’s latest hedge fund troubles have become something of a pattern for the nation’s largest bank and its asset management business. In February, Citigroup suspended redemptions in CSO Partners, after investors tried to withdraw more than 30% of the fund’s $500 million in assets. In March, it was the bank’s Falcon strategies funds to encounter problems.

Despite attempts to stabilize the fund with more than $600 million, Falcon closed. And in June 2008, Citigroup shut down Old Lane Partners after investors redeemed more than $200 million. Citigroup’s CEO Vikram Pandit was one of the founders of Old Lane Partners, before selling it to the bank in 2007 for $800 million.

Volatile market conditions and credit concerns have created hard times overall for the hedge fund industry. In 2008, new hedge fund launches are half of what they were only a year ago. Meanwhile, liquidations continue to rise.

Several of the hedge funds closed by Citigroup initially had been pitched to investors as fixed income products – safe and secure investments designed to provide higher yields. As in the case of the ASTA and MAT funds, that wasn’t the reality. Instead, the funds were highly leveraged municipal bond funds whose assets had been invested in risky and speculative subprime mortgages.

The funds’ managers assured brokers and clients alike that they would rebound even as the ASTA fund and MAT fund began to plummet in value. In the end, the funds lost up to 90% of their original value.

The investing public and Wall Street has surely made note of the recent bailout of megabank, Citigroup’s, Asta and Mat hedge funds due to uncertainty in the once-safe municipal bond market. The latest news brings one more warning to be wary of hedge funds whether you invest in them or manage them.

According to Financial Times online in a March 11 article by Francesco Guerrera, Citigroup initiated a $1 billion bailout of six internal hedge funds, with $600 million in additional capital and another $400 million targeted to boost the shaky funds.

The bailout by Citigroup showcases the risks taken by many Wall Street firms when they created or bought hedge funds in order to boost trading profits and collect high fees from investors. Of course, those risks also affect the investors in hedge funds. Because of the lack of transparency in the funds, hedge fund investors are at a disadvantage.

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